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I hear it all the time: “You can’t get 12%” or “Dave Ramsey’s advice on investing is dangerous”!
How can Dave Ramsey’s advice be dangerous to his audience? After all, he has helped more people get out of debt and save money than any single person in the United States over the past 20 years.
Listen to Steve Stewart and Joshua Sheats debate various financial topics presented by Dave Ramsey on his radio show.
Joshua Sheats; providing an alternative to existing broadcast radio
Joshua Sheats is a Certified Financial Planner, a CLU, ChFC, CASL, and has more letters after his name than a bowl of alphabet soup. His podcast, Radical Personal Finance, provides an alternative to existing broadcast radio advice on money management. BTW: Steve is a fan.
Joshua became a Dave Ramsey fan as a young man in college. Inspired by Dave’s book, The Total Money Makeover, he was able to graduate from college debt free.
He dogmatically followed Dave’s baby steps exactly, but realized, after talking to many people, that he was in the minority – they weren’t following Dave Ramsey’s plan exactly as it was laid out.
Joshua’s thoughts on Dave Ramsey’s advice
Note: Joshua does not want to be branded as a Dave Ramsey hater. He has a lot of respect for Dave and followed the Baby Steps himself for a period of time with much success.
“We as a culture tend to look for the answer in a book, a single book written by the expert. What we fail to realize is that a book is usually the perspective and opinion of a single man. When it comes to personal finance, we must remember that decisions need to be based on individual circumstances. While there are technically right and wrong ways of handling money, these philosophies must adapt to individual circumstances and situations. It’s important to avoid the dogmatic approach and teach people to think about their individual situations, then teach them how to achieve their future goals.”
“There’s nothing in the Dave Ramsey baby steps that can’t work, they just don’t because nobody does them. The Dave Ramsey plan is not what Dave Ramsey does. What made Dave Ramsey rich is not the baby steps. It was his high paying career with a successful side business. Once you’re attached to a person, you become blind to the facts of what they are saying. You have allegiance to the person despite the message and your personal situation.”
Leasing a car
Joshua gives the scenario of a temporary move to a city, where you need a nice car for business but you don’t want to deal with maintenance or the hassle of selling the car later on. Leasing might be a viable option.
Life insurance
Is 8-10 times your income enough insurance to take care of your needs? A young family may actually need 20 times their income. But a wealthy 55 year old may need much less.
12 percent rate of return
Is the 12% rate of return realistic? Even a slightly lower rate of return will drastically reduce your retirement following Dave Ramsey’s advice. Will saving 15% be enough if you start at 45 years old?
Long Term Care Insurance
Should you wait till 60 years old to buy longterm care insurance? A person needs longterm care insurance when they acquire large enough assets that need protected from the expense of longterm care. That could be age 40, or it could be age 70.
Great personal finance broadcasts
Three of the biggest names in financial broadcasting are Ric Edelman, Clark Howard, and Dave Ramsey. Each offers free advice to individuals and points people to different resources for deeper one-on-one assistance.
- Ric Edelman: A Financial Advisor who uses his show as a marketing tool for his business. He will answer listener questions in a general way and encourages his callers to seek more advice from his own firm.
- Clark Howard: Interested in finance and has studied a lot. He gives simple answers to his callers and encourages them to seek more specific advice from fee only advisors.
- Dave Ramsey: Gives financial advice from his own debt experiences. Dave has rules and rarely deviates from those rules regardless of the personal situations. He will send people to his ELPs for more education and encourages people to never buy or invest in anything they don’t understand.
Steve gets the final word
An educated consumer is a better consumer. It’s up the individual to take the advice and apply it appropriately to their own circumstance. Don’t ever follow Dave Ramsey’s advice because “Dave Ramsey says…” or what Joshua says or what Steve says – you need to delve further and seek advice for our own personal situation and circumstances.
The enemy is financial ignorance and illiteracy.
Become a Debt Freedom Fighter by learning how money really works and pay attention!
Links mentioned in this episode:
Post: The shockingly simple math behind early retirement by Mr. Money Mustache
A few thoughts about podcast:
Joshua Sheats is incorrect, in my opinion, to say the Dave Ramsey’s program does not work when he’s talking to people who claim they are doing the program but they continue to carry debt on credit cards and take out 30 year mortgages. That’s like someone continuing to overeat, but they say they’re on Weight Watchers, and then J. Sheats says Weight Watchers doesn’t work. The money stuff works when you work the program and if someone wants to tweak it and do it their way, then they are no longer working the Dave Ramsey program.
I can’t speak to the rate of return (12%) because I haven’t yet sat down with an advisor to look at my options. I’m contributing to my 401k but I’m not at the 15% mark yet but I intend to get there. I’ll follow Dave Ramsey’s recommendation to invest 15% because I am willing to make that amount work in my budget.
Dave Ramsey constantly tells callers to learn about a financial product themselves and not to do something because he said so or someone else said to do it.
I found motivation from Dave Ramsey, and encouragement from other writers as well.
It has been good to actually know where my money was going each month and it has been a discipline I have kept up since 2010.
There is a part of me that suspects some of the negative commentary was used as a way to get some attention. (I looked up Radical Personal Finance to see if I wanted to add it to my podcast subscriptions.)
I can agree that it’s a good idea for people to be educated about their money. Too many people act as though they don’t have to tend to their own finances, that things will just work out, and that is not the case.
Comparing the wealth that Dave Ramsey has accumulated to what the average Joe Blow can do is like comparing apples to oranges. He has book deals/advances/royalties, real estate investments, and a business. He found a way to make money and good for him – that is one of the American Dreams. He’s also found a way to help millions of people who choose to tune into to his show. And he gives away quite a bit of his merchandise to help people.
I enjoyed listening to the discussion even if I didn’t agree with all of what Joshua Sheats decided to share. Good luck to him and his podcast.
Elizabeth,
What an excellent, thoughtful comment!
I think your dieting example is an excellent metaphor to compare to financial advice. In diet planning, they have a metric called “adherence” that you can compare diets based on. A simple example would be a low-calorie deprivation diet, for example 1000 calories per day. Low calorie diets can work–you will lose weight if you adhere to the calorie deprivation plan. But, they don’t work because no one adheres to them because they’re too deprivational. And, even if they do it for the short term, they don’t do it for the long term because it’s too tough.
That’s precisely what I mean when I say, “It’s not that the Dave Ramsey plan can’t work. It’s just that it doesn’t work.” I don’t think there’s any reason why someone who follows Dave’s plan can’t have amazing long-term financial results. There’s nothing wrong with the 7 Baby Steps.
But, in the years of working with clients and the dozens of fans I’ve interacted with, I’ve so far found none who followed each step of the advice. (I was the only one I ever found.) I think there are many thousands of people who are diligent to follow each step of the advice…but I haven’t found them in person in my area.
The challenge however is that when I’m working with a client, many DR fans haven’t been able to distinguish between general advice delivered over the radio as entertainment and specific financial advice delivered by a competent advisor who knows a client’s personal situation.
Continuing the diet example, I would compare it to this: the official Food Pyramid suggests a certain amount of whole grains in the diet. And yet, a doctor working with someone who has a gluten intolerance or celiac disease will change that recommendation and recommend no grain intake.
As long as the patient (client) is able to discern between the general advice and the local expert who knows their situation, all is good. But, if the patient (client) is overly attached to the generalized advice because of too high a degree of attachment to the individual, it can be problematic.
Keep listening to the show and benefitting from the encouragement and motivation! Dave is a master in that area. (I’m trying to learn how he does it so well!) And, consider adding to your knowledge from other voices as well!
Good luck!
Agreed.
Joshua pointed out a lot of good information.
It is amazing to me the looks that I get when someone comes in my office we discuss financial principles, they mention Dave, and, in the interest of full disclosure, I disclose that I am not really a Dave fan. I believe he delivers biblical principles but not always in a biblical way, at least on the radio show. Unfortunately, I lost a lot of respect for what he had to say when I heard him tell someone that there was no reason (legal, tax or otherwise) they should think of incorporating (without really getting any facts), then went and looked to see that his company is organized as a corporation. There are lots of benefits to incorporating or forming an LLC. It just depends on the situation.
Dave has lots of good advice and lots of good answers. Often they are presented as the only answer and that is just not true.
Unfortunately, I think the problem is that most people don’t want to learn enough to make an educated decision for themselves. I have come to the conclusion in my practice, most people just want to be told what to do. I can lay out the information, give someone options and (most of the time) it is followed by them wanting me to tell them exactly what to do. As Joshua said it seems the average American doesn’t want to take the time effort and energy to get the education to make a good decision.
Deanna,
Your experience is similar to mine in many ways. For some reason, it seems like in our culture many of us want to simply feel confident in what we’re told by an expert. We often feel intimidated by topics we’re unfamiliar with and, instead of really diving deep into the subject and learning, we’re looking for a quick answer and the validation of another.
There is almost nothing in financial planning that is cut and dried for all people. The more you learn about financial planning, the more you see the multiple options that can work in various scenarios and you see the need to really understand the details of the case.
The good news is this: I think Dave is a perfect entry point for people just starting to pay attention to their finances. (Although MoneyPlanSOS is giving him a run for the money! 🙂
Paying attention to your budget, thinking about your goals, getting out of consumer debt, and starting to save and invest…these are fundamental steps.
Then, hopefully, when a client’s situation grows beyond that, I hope that they will be open to other input to take them to the next level!
“Most people just want to be told what to do”. Amen Deanna. You hit the nail on the head. We are so busy with our sports and work and making dinners and keeping up with old high school friends on FB that we don’t make time for trivial things like learning how money really works. That’s why this podcast exists – and I believe that’s why Joshua Sheats does his show as well. We can educate individuals while they are driving, mowing the yard, jogging, any number of things that allows them to listen while they work. And the skip button is right there next to the play button in case you decide I’m just spouting Dave Ramsey. 🙂
Thanks for the comment Deanna! See you at FinCon15?
Just listened to this episode and didn’t find it critical or “negative” at all; I think that Joshua’s advice was generally sound and well-reasoned.
I’m not yet a DR follower, nor Suzy Orman or any others – I try to research the topic and get a variety of opinions and inputs to help form my own opinion. In this respect I think that Joshua is spot-on to seek qualified advice when making serious financial decisions – its to the listeners to determine if the source they are listening to meets that criteria.
I definitely did like that this episode took on to learning ‘differing’ opinions and hope that Steve brings Joshua back and other personalities who can offer a differing point of view – content that resonates (from anyone) will always rise to the top. 🙂
Great episode – been a listener to Steve for sometime now, and will definitely be listening to Joshua’s podcast as well!
Thanks Ted. You don’t need to be a follower of Dave Ramsey, or Suzy Orman or even me (though I appreciate you being a Listener). You need to do just what you are doing: “research the top and get a variety of opinions and inputs to help form [your] own opinion”.
This has been the goal of my podcast since the beginning: To show people how money really works. Yes, I may hate credit cards but I won’t force you to cut them up or call you stupid. I will, however, show you the damage it is doing to economies – the economies of mine, yours, and our country’s.
I’m so glad you have been a long-time listener Ted. Thanks for commenting today!
PS: I don’t think I have anything else to bring Joshua on to discuss that he hasn’t already covered in his 1-2hour long daily shows. I think he has already surpassed me in total number of minutes released – and I’ve been at this for 4 years! 🙂
Hey Ted!
Thanks for the comment! The thing I love about podcasts is that it gives a wonderful forum to discuss and debate issues together. Then, it’s up to the listener to decide what works for them!
My hope is that with this format we can give deeper information for people and encourage them to take personal responsibility in every area of their life!
If all of you wonderful listeners leave nice comments like this, perhaps Steve will have me back! 🙂
Joshua
I love this podcast so much that I have listened several times and downloaded it to archive and keep with my other financial information. It was a great ‘debate’ in that both Joshua and Steve made the strongest points for their respective positions while obviously showing respect and love (well let’s say like) for each other. Both Joshua and I seem to believe that Dave Ramsey is the greatest when it comes to debt reduction and motivation. I personally listen to every episode of various podcasts. in addition to Money Plan SOs, I never miss Dave Ramsey, Clark Howard, Ric Edelman, Stacking Benjamins, Ray Lucia, Boomer’s Braintrust and now (since Steve introduced me) Radical Personal Finance. (I’m allowed to do this because I am semi-retired and have a very well used MP3 player that I carry with me everywhere.)
But this is also such a great podcast because it exposes things that must be said. I love to listen to Dave Ramsey but I cringe each time Dave steps into the arena of investment advice. Just yesterday a caller asked Dave whether his wife should take the lump sum or monthly pension. Dave immediately said he should take the lump sum without asking about what the figures were, whether there was a cost of living adjustment, any information about a survivor benefit or the family’s other financial situation. At the end of the call, Dave punctuated his advice by saying “I’d take the lump sum, today.” While taking a lump sum might be the best choice, this is an important, complicated and irreversible decision. To make this decision based on a 2 minute talk with a radio advisor is dangerous and reckless.
Here are some areas where Dave Ramsey is dangerous: He advises that 100% of all investments be in 4 classes of actively managed mutual funds and paid for owned real-estate, ignoring 40 or more other asset classes that could help mitigate risk. He always tells people to cash out a permanent life insurance policy. This could be a financially dangerous decision depending on when the policy was purchased. He continues to use average rates of return in projecting future value of investments (the infamous 12% rule). This is the easiest to debunk based on sequence of returns. Consider an investment of $10,000 that loses 65% the first year and then gains 30% for the next four years (average rate of return = 11%) At the end of five years you have not $16,851 but (ta da) $10,000.
He says NEVER buy Long Term Care Insurance before age 60. This one is personal for me. I purchased a LTC policy at age 53. At age 54, I had a medical incident that, while it did not put me in long term care would have prevented me from purchasing a policy at age 60 with preferred rates. Since policy rates are actuarially calculated, a person buying LTC at 53 pays less than someone buying it at 60. But according to Dave no one needs LTC before 60. So what? Just because virtually no homes burn down each year, I’m not cancelling my homeowner’s policy.
So I stand with Joshua Sheets in saying “We love you Dave, but which just wish that when it comes to complex problems that have complicated answers, you don’t try to apply a one answer fits all situations response.” (Sorry the quotes are intended for me, Joshua. I’m not trying to put words in your mouth.)
Second Timothy
Thanks Second Timothy! I love it when you comment or when I hear about you on Stacking Benjamins. You are becoming quite the regular ’round these parts. 🙂
I am going to go to bat for Dave Ramsey here: Many, many times he will say “you need to get better advice than just a 5 minute conversation on the radio”. I also like his recommendation for the 4 types of mutual fund classes and paid-for real estate because it is fairly diversified. How much more does the average person need? (Note: He also promotes building a business, which I also believe is a smart money move).
However, I will concede that many people can benefit from other asset classes. It’s rather difficult to do a 25/25/25/25 mix in a company’s 401(k) but it’s easy to get into an Emerging Market fund or Global fund.
I’m glad you purchased LTC when you did. What I like about DR’s advice here (never buy before 60) is that he taught me not to question the need just because a financial advisor thinks he needs me to buy it. But I also know my health and family medical history that could cause me to buy it when I get older – and probably before 60 like you did.
The Dave Ramsey Show caused me to question everything I had learned prior to 2003. I challenged all the crazy “cut up your credit cards” and “pay off your house – you don’t need the deduction” talk and found that I believed the same thing he did. This caused my wife and I to focus on our money, get out of debt, and double our net worth in the past 8 years (yes, even after our investments dropped 50% in 2008-2009). It is my hope others will spend more time listening to great financial podcasts like you are and dig deeper to find what is truthful FOR THEM.
I can’t wait to hear your success story Second Timothy. Drop me another line soon, OK?
Second Timothy, I should have just had you come on and argue my side of the debate! Each of those is an excellent example of what I’ve observed over the years and, as you put it, several of them are quite cringe-worthy. (The lump sum advice is probably the best example of a very short-sighted answer. You need far, far more information to make a good analysis of that.)
I’ve been listening to Dave Ramsey for almost five years now and I can say most of the things the guy said about Dave Ramsey was incorrect. I don’t think this person really listens to Dave Ramsey.
Daniel: Can you tell me what makes you think that Joshua doesn’t listen to Dave Ramsey? Well, other than his admission that he hasn’t listened in a couple years?
Second Timothy, I should have just had you come on and argue my side of the debate! Each of those is an excellent example of what I’ve observed over the years and, as you put it, several of them are quite cringe-worthy. (The lump sum advice is probably the best example of a very short-sighted answer. You need far, far more information to make a good analysis of that.)
I agree fully with Josh. I love the baby steps and I’m close to completing number two. However when I started listening to his show (after listening to Stevens earlier shows when he went through them all) I figured out that Dave himself isn’t for me. After two years of listening to financial podcasts and paying attention, I wouldn’t seek out Dave for investment advise, other than very general common sense information, which As Josh spoke about, he could be more careful in the way he gives it and let some of the Dave cult children who are ready to fly, leave the nest. I have to say Steve you have been instrumental in my common sense financial education and motivation through baby step number two. And I will keep listening when I’ve finished but I know eventually the day will come that I don’t have time because I need more in depth and advanced information for where I ‘ll be financially. That is a big win for Steve, mission accomplished, he’s help me from the moment I decided to sort my finances out, all the way through to debt freedom, where I will remain for ever. That is Steve doing his bit in the collective whole of the war against the enemy.
Love your work as always Steve, I am a Steve lover not a Dave lover.
I really enjoyed your approach Josh and I’ll be checking out your site.
Allen: YAY! I’ll count that as a WIN. I’m not a financial advisor and don’t want to be. I’m not interested in selling financial products and insurance for a living. If you say that I was instrumental in helping you PAY ATTENTION to getting out of debt then my job is done. Well, at least with you it would be.
I won’t be hurt one bit if you begin looking elsewhere for more advanced information. Even I have a financial advisor. Most of us can’t do it all on our own so I’m glad you found this show helpful. Please recommend it to others when you find them caught in the debt trap and need encouragement to get through the mess.
Oh, and an iTunes review would be helpful too. 🙂 Thanks Allen!
“Adapt what is useful, reject what is useless, and add what is specifically your own” is a quote that is attributed to Bruce Lee and one that has served me well in all walks of life. Whether it’s losing weight, learning a new skill or trying to get my finances in order, I try to seek out as much information as I can from others that know more than me, sift through that information and then take from it the gems that I’m able to find and apply them to my life. Joshua, I had not heard of you before I listened to this podcast, but will definitely add your website to my must read and add your podcast to my rotation. My engineer’s mind loved how you got into the thinking behind the numbers and questioned where Dave gets his numbers.
Steve and Joshua, I want to tip my hat to both of you for an amazing discussion. It’s sad that the way you guys were able to sit down with different viewpoints and calmly and politely discuss your sides has become the exception and not the rule. There was no shouting over each other, petty name calling or childish ridiculing of opposing viewpoints. It was refreshing to hear and a testament to your character.
Thank you both for a great podcast.
Wells said.
Joe, I’ll try to do better next time and begin the show with some Jerry Springer music and a bullhorn. That should make our show more “normal”. 🙂
I appreciate you listening and especially for commenting. I appreciate you. I’ll tell Joshua you are heading over there next.
Hey Steve and Joshua!
Thanks for the episode, I really enjoyed it. I realized while listening that I share a lot of the same thoughts as you Joshua.
While I’m a Dave Ramsey follower, I do not follow all of his advice. Our starter emergency fund was larger than $1000, we went on three long / expensive vacations before we paid off our debt, I paid off student loans based on the highest interest rate first, we started contributing 15% to retirement before we were done with Baby Step 2 and we added a large patio to our house before our Step 3 Emergency Fund was fully funded.
I think Dave’s advice is a great framework as a place to get started. I can happily say that we are completely debt free after paying off more than $100k in student loans before I turned 30. We’ve already got retirement taken care of and we’ll have a full emergency fund in the next couple months.
If I were pointing somewhere for financial advice, then I’d definitely point them to Dave Ramsey to get the framework down and then have them tweak and modify as they get more comfortable with their finances.
Agreed, you didn’t follow Dave Ramsey’s plan with gazelle intensity. All that did was delay your debt-free-date (and caused you to pay more interest). But you didn’t quit or get distracted by a shiny new car. Good job!
While you didn’t stick to the Baby Steps you certainly still beat the debt devil. That’s all I really care about: Encouraging you through your “get out of debt” stage and teaching you to pay attention so you don’t get taken to the cleaners.
You rock Dustin!
Great episode guys!
As the son of a CFP, I’ve been privy to dinner table discussions around many of these topics for my entire life. While I can not remember my dad ever talking down Dave, and I’ve never read any of his books nor listened to his program, I greatly enjoyed y’all’s conversation from a relatively neutral perspective.
My biggest take away is something I witness on a daily basis in the health/fitness industry, and that’s the importance of sound advice on an individual basis. Financial decisions are complex, and we’ve all heard stories of one wrong decision costing someone thousands (if not more) of dollars. If any expert in any industry is touting a one-sized-fits-all philosophy (not saying that Dave does, again I’m a neutral here) I immediately question anything and everything that expert says. There are simply too many variables in place to think that any one piece of advice (no matter how sound) is right for everyone.
Thanks for the great discussion, and thanks for ultimately being on the same team helping, educating, and inspiring people to strive to make wise financial decisions now and in the future!
Denny
Dave, your perspective is absolutely correct. (“If any expert in any industry is touting a one-sized-fits-all philosophy (not saying that Dave does, again I’m a neutral here) I immediately question anything and everything that expert says. There are simply too many variables in place to think that any one piece of advice (no matter how sound) is right for everyone.”)
Unfortunately, it took me a while to learn it!
What an awesome and timely show!
I just listened to the Dave Ramsey show and he took a call from a widow with 3 kids (1 of which was disabled), and a year and a half after her husband died she had about $500,000 in the bank and didn’t know what to do with it, and whether or not she would need to go back to work. Dave, true to his formula, told her to invest it in mutual funds (wisely and carefully) which get a 12% return, and in that way she can pull out 8% and keep the `1/2 million principal intact. I came away from that show thinking what would an actual financial planner tell this lady? I’d heard about the 4% rule and I just felt like the 8% draw was a little crazy. Next on my podcast list was this show where you debunk the whole 12% thing.
I enjoy listening to Dave’s show because it keeps me thinking and motivated. Dave is excellent at sound bites, motivation, and KISS. KISS is an acronym for keep it simple stupid, and I think that is what works in entertainment radio. He has a series of simple soundbites that probably work in most cases.
The other thing that Dave has and uses on a regular basis is a mute button. He can get to a certain point in a conversation where he gets enough information, where he can implement one of his soundbite solutions. At that point he hits mute and gets on his soapbox. It works though the show moves quickly, and keeps lots of people coming back.
Also I have to give Steve some props on this show. I have listened for the better part of this year and I think that interviews, rather than monologues, are much easier to listen to and understand. So buy another microphone so you can bring back excellent guests like Mr. Sheats.
Chad
Thanks Chad. I appreciate you slogging through my solo shows. I’ll be bringing on other guests when they have something to contribute. It’s just hard to find good ones that aren’t out there trying to sell you something.
I am open to having guests with opposing views – like Joshua. Maybe I should start a weekly roundtable like Stacking Benjamins. Or not.
I just heard Dave give some bad advice concerning an NUA (Net Unrealized Appreciation) situation. He apparently has no idea what an NUA is and brushed it off as a reference to Dollar Cost Averaging. I don’t understand NUA completely, but Dave might have cost the caller over $3,000 with his advice. During the call Dave said “you got a Dufus on the phone” referring to the Wells Fargo rep that pointed out the NUA situation to the caller. Unfortunately, Dave might have been the actual “Dufus” this time. :-/ The call is available (for about 2 weeks) on the Dave Ramsey site at http://www.daveramsey.com/show/archives/?snid=show.archives on the 10/20/14 show from 0:52:42 to 0:56:55.
I’m very much a Dave Ramsey fan, and I think he does help thousands and thousands of people. However, I do take what he says with a healthy dose of skepticism (as I do with any broadcaster, podcaster, or author)
Great podcast and interview!! I tried to listen to Joshua’s podcast a couple months back but downloaded too many episodes and the size almost crashed iTunes!! 🙂 Perhaps I’ll listen again but download fewer episodes on my device at a time!! 🙂
I don’t know what a NUA is either. My finances are much simpler than that and the most complicated financial product I have is called a 401(k). I ain’t smart – but I ain’t broke!
Thanks for commenting Rodney.
Rodney,
That’s a great example of what’s frustrating to many financial advisors about Dave’s style. He’s 100% dead wrong about what he’s saying and the Wells Fargo rep is 100% correct. (For anyone who is interested, I pulled the 3-minute audio clip from his show archive and you can hear it here: http://bit.ly/DR-on-NUA )
He calls the rep a “doofus” but Dave is the person who is 100% wrong. He accuses the rep of simply being inexperienced and following a script. (The rep is following a script. The script is designed to save the plan participant a large potential tax benefit.) But Dave sounds so sure of himself and is so forceful that an average listener will never pick up on how disastrous his advice could be. In the years I listened to him, I never heard him admit a single instance of being wrong or giving incorrect advice.
I wouldn’t expect a “normal person” (a non financial advisor) to know about NUA. In fact, most financial advisors probably can’t explain it well. But they should at least be aware of its existence. It’s standard on the CFP exam for all financial planners.
And, it’s far more important for someone who is giving public advice to have done their homework and know about stuff like this.
For those who are interested, Net Unrealized Appreciation is a special rule that allows you to pay long-term capital gains tax on investments in a 401(k) instead of ordinary income tax rates.
It may, or may not have any impact on this person’s situation. Let me explain NUA first.
NUA applies when you hold employer stock in an ESOP or any other qualified plan (including a 401(k)).
(For what it’s worth, Dave would always advise against holding employer stock in the first place–or any other individual stock–so that would be his defense against utilizing NUA at any time if he were ever confronted with this mistake. That’s probably one reason why he’s unfamiliar with the topic.)
Basically, the Net Unrealized Appreciation (NUA)–which is the difference between the employer’s cost basis in the stock and the market value at lump-sum distribution to the employee–is not subject to taxation until the employee sells the stock.
The NUA gain is ALWAYS taxed at long-term capital gains rates, REGARDLESS OF HOLDING PERIOD.
If the client keeps the stock for >1 year from the date of distribution to the date of sale, that growth can also be taxed at LTCG rates.
As an example: Suppose that someone has a plan which contains contributed stock in a retirement plan with a basis of $20,000. The stock is then distributed at retirement with a market value of $200,000. The NUA is $180,000 and is not taxable until the employee sells the stock. The $20,000 basis is taxable now as ordinary income. (Beware, this is what we call “phantom” income.). The $180,000 NUA will always be LTCG no matter when it is sold.
If you were to compare this to a 401(k) account that is rolled over to an IRA and the client is in a 30% tax bracket, you can see the cost savings.
If the client does NUA: she pays 30% income tax rate on $20,000 ($6,000) and then pays 15% LTCG rate on $180,000 ($27,000). Her total tax bill is $33,000. (Note: she could have kept the stock longer or sold it immediately. That’s a whole different analysis.
If the client follows Dave’s advice and ignores the “doofus” who’s trying to tell her to actually calculate something to find out what is in her best interest, her bill looks like this: no current tax due because she rolls it into an IRA (thus avoiding the phantom income) but then all of the money is taxed at her income tax bracket. Assuming a 30% income tax rate on $20,000 of basis ($6,000) plus 30% on the $180,000 of gain ($54,000), her total tax bill is $60,000.
Dave’s advice would have cost her an extra, entirely unnecessary $27,000 of taxes.
With regard to the specific caller with $36,000 in their account, this may or may not have been a big deal. It’s impossible to know without knowing the basis of the stock, the growth, the marginal tax bracket, whether the client wants to hold the stock, etc. I would not make the argument that Dave specifically damaged this person’s financial life. It very well could have been a wash because of the small numbers involved.
But, it’s possible that the client in this case could have simply gotten the stock out of the 401(k) by utilizing the NUA rules, sold it immediately and paid LTCG rates instead of the ordinary income rates he will pay by following Dave’s advice to roll it into an IRA. Given the small size of the account, his tax rate might possible have been 0%.
The caller could also have kept the stock, and, assuming appreciation, have enjoyed a far lower LTCG rate a long time in the future instead of losing it by rolling it into the IRA>
Ho lost a potentially very valuable tax benefit by following Dave’s advice.
Dave has perhaps 7,500,000 people listening to his show each week! And there are tens of thousands of people who can save millions of dollars in taxes if he’ll give them good advice on it rather than personally attacking a bank rep who was doing a good job.
He has a responsibility to be more careful and more knowledgeable on important specifics like this. Or, at the very least, he has a responsibility to make a referral to a knowledgeable professional who will actually know the rules.
Perhaps the ELP could help the caller catch Dave’s mistake. Let’s hope so.
I really thought this was a GREAT episode. I listen to Dave almost every day at work, and it was Dave that got me interested in personal finance and really getting control of my finances. However, I loved the respectful, insightful discussion about Dave and I agree with a lot of the information provided here. As I delve into the PF world more and more, the more I listen to Dave for the entertainment and motivational value, and less on the “do what Dave says” mentality.
Thank you for doing this!!!
P.S. There were some great recommendations in the show and in the comments about other blogs/podcasts that I will be subscribing to. 🙂
Thanks Ashley. Another show you might want to go back and listen to is Austin Netzley’s YoProWealth podcast. He has always approached the topics without imposing too much of his own beliefs in the messages.
Hi everyone,
For the past 5 years now I’ve been a Dave Ramsey fan. I took FPU in 2009 and have now coordinated 4 classes, attended a couple live events and had the honor of meeting him at a coordinator rally last month. My wife and I are building our financial portfolio the way he teaches. We even began our marriage in 2011 DEBT FREE! *had to throw in a quick brag*
I really appreciate this show in the way it forced me to challenge my perspective. Joshua did an excellent job of making sure he didn’t come across as a Dave hater and I think I accomplished that. However, most (not all) of what he said I disagreed with. I’ll just propose one:
Joshua said Dave does not live what he teaches. His claim is that Dave teaches the baby steps so the everyday family will end up rich, but does not follow it himself because he built businesses to get rich. This is a ridiculous slam. While building large businesses certainly accelerated Dave’s wealth, it does not mean he doesn’t follow his own teachings. Throughout FPU and the radio show he constantly uses his own life as a example whether it’s pre-bankruptcy or post-bankruptcy. (1) He has an emergency fund. (2) He is debt free. Even his multi-million dollar business. He has no credit cards. (3) He has a fully funded emergency fund. (4) He paid for his kids college. (5) He only invests for the long term in well diversified mutual funds. (6) He recently paid cash for a several million dollar house. (7) He gives so often, so much, and so systematically that he has a family foundation operating his giving.
Point in short. He lives what he teaches. Just because he has more money than most of his “students” doesn’t mean he doesn’t follow his own rules.
Thanks again for challenging my thoughts.
Guy,
Congrats on beginning your marriage debt-free! That’s fantastic!
I will fully concede your point to this degree. Dave is consistent to practice what he preaches as far as his plan. I personally believe he is genuine and sincere. He doesn’t violate anything he teaches. Each of your seven points is correct. He does follow those things.
He also admits that he declared bankruptcy to clear his own debt. He openly discusses how heartwrenching that process was and discusses why he is so strongly anti-BK.
I have a difficult time believing that at his stage in life he and his wife do a budget on a legal pad and they have a grocery budget, but because he says he does, I’ll bet he probably does. (Even if it’s only so he can continue to teach others what has worked for him.
I also have a difficult time believing that at his scale of wealth he is personally buying and managing individual pieces of real estate, but, since what he actually does with his money is little of my business, I’ll ignore that one. It often sounds like he is buying individual units like he recommends, but perhaps he’s simply referring to his own purchase of a large apartment building or something.
Frankly, it’s just none of my business.
My criticisms are a bit more nuanced and are of our personal finance advice industry as a whole. If you’re interested in a good start, try reading Pound Foolish. http://www.amazon.com/Pound-Foolish-Exposing-Personal-Industry/dp/159184679X/
I certainly don’t endorse all of the author’s conclusions, but I find myself challenged by them.
My primary point is that the biggest reason for his massive wealth is not due to saving 15% into mutual funds but into building a massive business using tremendous leverage. I don’t mean debt-leverage. I mean leveraging a market opportunity, hard work, technology, savvy, etc.
He’s a brilliant and hardworking businessman. He deserves his success.
My primary point was simply that his financial success was not due primarily to the 7 points you mentioned. He could have borrowed money, leveraged many things, etc. and still have become fabulously wealthy. Many have and many will.
Perhaps he has more financial peace than they will ever have–I’ll give that one for sure.
I have no desire to live a leveraged lifestyle, borrow lots of money, etc.
But, the reason he got rich is that he built a massive business. That was my point in a nutshell.
(Full disclosure: I’m doing everything I can to copy him and do exactly what he did! 🙂 And, I recommend to my listeners that they do the same thing!)
I understood what Joshua was saying about Dave not doing what he teaches, but I’m with you Guy – Dave Ramsey is living what he teaches now.
I will also agree with Joshua’s comment. It seems unusual that Dave Ramsey would need to do a monthly budget with his wife – it’s unnecessary at his income level. However, you and I know that the best way to be purposeful with your money is to forecast your spending (i.e.: Budget) and track your expenses. While I doubt Dave Ramsey is tracking every purchase using YNAB, I do believe he has a system that works just fine. I think I remember him saying he uses Quicken – or had in the past.
Joshua is not up-to-date on Dave Ramsey’s real estate investing. Dave mentions quite often that he has someone else helps him select and manage his properties – “Where there is no counsel, the people fall; But in the multitude of counselors there is safety.” I’d bet Dave does look at the numbers of each property but does so with the help of others. He also mentions quite often that he has other manage the properties for him. Same reason as above: There’s only so much Dave to go around and he can benefit by paying others to help do what he doesn’t have time to do himself. That’s what I would do if I were in his shoes.
Side note about the book Joshua recommended: I won’t be purchasing Pound Foolish. It was written by a woman with no financial expertise and she attacks the popular gurus openly with venom. Yes, I’m judging the book by her cover (I’ve seen her interviewed on a number of shows and she’s full of negativity. No thank you).
Guy, thank you for being a Debt Freedom Fighter! We need more of you out there helping people realize there is a better way to live than under the thumb of credit card companies and find a way out of the debt slaughter! Congrats on being debt free! I want to have a cup of coffee with you some day!
I know I’m a little late with my comment about the show, but I have to say this is one of my favorite podcasts to date. I like listening to Dave Ramsey and often download his shows. But I have to agree that his advice is off when it comes to expecting 12% because you are not going to always get and sustain that over your working lifetime. Also, I have to admit I am one of those who loosely followed Dave’s plan. I’ve paid off debt smallest to largests while continuing to fund Retirement and build a large emergency fund since I was looking for jobs out of state that would require cash on had for the move. Plus I still keep a credit card for vacations, car rentals and hotels. I only use it about twice a year and immediately pay it off but i feel better having a credit card on vacation than debit card where my account is attached.
Thanks Kisha. I’m sorry it took a controversial subject that borders gossip to be one of your favorites. I’ll try to do better in the future 🙂
This might sound weird coming from me, but I’m really glad you said “agree that his advice if off when it comes to EXPECTING 12%…” Don’t expect 12%, just strive to do things that could get you there (ie: Invest).
I do want to make sure you understand what Dave Ramsey is saying about the 12% return. You said in your comment above “going to always get and sustain [12%] over your working lifetime.” Dave Ramsey, nor I, have ever stated that you would. He is saying very clearly that 12% is the average of the stock market over the past 70 years. 12% is an average – and here is the important part -> over a long period of time.
Here is a section of a post I wrote on EnemyOfDebt.com: “Dave Ramsey was right, you can make 12% in the market. You can also lose 50% but then gain 27.1%, 14.3%, and 13.4% over the next three years.” I don’t expect 12% because the market is volatile. Thank goodness, because I can buy when the market is down. I hope you are doing the same.
BTW: If you had been following Dave’s advice you would have held off paying extra on debts and investing to save up the big emergency fund you had while looking for the out of state jobs. That’s the “push pause on your Total Money Makeover while the storm clouds are coming” thing you hear Dave say all the time.
Did you make the move? How are you doing now?
Hi Steve, I am waaaaay late to this party, but I just listened to this podcast this morning, my second MPSOS to hear. I respect Joshua and appreciate his insistence and careful wording to respectfully criticize, and not hate on DR. I truly get exactly where he’s coming from, I see the cult of personality in my own circles.
I agree with some of what Joshua is saying. It is dangerous to blindly follow what someone else says, without truly applying critical thought concerning your own situation. I do have some observations however. I agree strongly with other commenters that saying “Dave’s plan doesn’t work” is misplaced criticism. It’s THEIR fault if they didn’t follow the plan, not that “Dave’s plan doesn’t work”. There is a big difference. If you truly followed the plan, it’s possible you can say, “I followed Dave’s plan and got horrible results, so it doesn’t work”. You cannot say, “I have a 30 year mortgage, I don’t really do a monthly spending plan, I bought a 10 year term policy and didn’t invest and am now SOL on insurance, so Dave’s plan doesn’t work”.
Anybody who is working Dave’s plan will tell you it does work, if you work it. I will certainly concede that I don’t know the nuances of a high-value estate and how to use insurance to cover taxes and estate legal fees, but I would certainly look for a way to use a 20 year term policy to cover that amount and during the 20 years, the estate should have generated way more than enough to cover the fees if the person died after the term ended. Again – I’m saying it’s more that I’d look at every angle of that, I’m not saying I know one way is right and the other is wrong. For most people, as we know, term life insurance is the better way to go AS LONG AS you invest properly during the length of the term.
The other thing was his comments and examples on 12%. In his example, Joshua says it’s pointless for a 40 year old to save 15%, that he’ll never retire. Let’s run the numbers…
I put in 9% RoR, average household income of $55,000 = 687.50 a month, from 40 to 65, = $761,000.
At 4% drawdown, $761,000 *.04 / 12 = $2536 a month, plus SSI of maybe $2000 a month (assuming a spouse? I’m unsure of this, but I think it’s close), total income in retirement of $4536 a month. Even if you use 8% RoR it would be $2171 a month + SSI. It’s dangerously close to a $55,000 income.
And as DR always says, this assumes no raises during that 25 years. And, we know that if you’re following the plan, during that 25 years the house would be paid off and you’d increase your investment percentage up from 15%. I think Joshua was wrong on that. I think the 15% number works in almost all cases; you may have to educate the 50 year old who still has a mortgage and car payments that he’ll be working for a while. But prior to listening to Dave, that person wasn’t saving any money anyway!
And the thing is that you, me, Joshua, we can all play with numbers and spend 50 hours setting up “the perfect retirement plan from heaven” to paraphrase DR’s budget analogy. It won’t be the same. It will either be better than, or worse than, our predictions. It can never be exact. But it’s a target. What’s the quote, if you aim at nothing you’ll hit it every time? Dave gets people aiming. He gives them hope. It isn’t a false hope IF they will do the steps in the plan.
Joshua admits got tired of hearing clients say “But Dave said…” I can understand that and I certainly understand that each client’s needs have to be looked at individually. But Joshua also has to put gas in the yacht and sell some financial products. I think some measurable percentage of his frustration comes from DR fans not wanting to buy some of what he sells. Certainly, in the CFP world in general, this is the case. If your business model is selling some form of whole life insurance (not saying Joshua’s is), then you better know exactly what Dave says about it and know how to sell against his objections, or your kids will starve.
David, I couldn’t agree with you more. There is a cult of personality going on with Dave fans (me included), which is exactly why this podcast needed to happen. I summed it up at the end: Everyone needs to learn for themselves and do their diligence, starting earlier is better than later, but following Dave Ramsey’s advice is not dangerous. In fact, I would go on to say that I think doing the opposite of Dave’s advice is worse than anything else.
The anti-Dave would say “Don’t save for emergencies, borrow more money instead of paying it off, and don’t invest for retirement”. Now THAT is dangerous advice.
Thanks for listening David! Thanks for becoming a Debt Freedom Fighter http://stevestewart.me/fbgroup
Hey Steve,
Just wanted to weigh in on the life insurance needs question…
I don’t love or agree with everything Ramsey has to say, but I don’t mind when I hear him say that people need 8-10 x their income in life insurance.
First of all, it’s a fact that people overestimate the cost of life insurance, and for someone who has zero coverage, I could see them thinking that 20-30x their income would cost a fortune.
LIMRA, a life insurance research agency, reported that on average, consumers overestimate the cost of life insurance by 3x. Here’s an excerpt from their recent analysis of life insurance buying trends:
“Survey respondents were asked to estimate the annual cost of a 20-year, $250,000, level-term life policy for a healthy 30-year old consumer. The actual cost is roughly $150, but Americans estimate the cost at $400. Younger adults, who are most likely to qualify for preferred pricing, overestimate the cost by nearly seven times the actual cost.”
Of course the answer to “how much do I need?” is complex. It depends on many variables such as:
– age of the insured and age of the beneficiary/ies
– current assets/liabilities
– # of working years until retirement
– health of the insured
– health of the beneficiary
– and more…
I’m sure Ramsey is just giving a general rule of thumb, and in my view, if he’s promoting term life insurance, and some people go get insurance who didn’t have it before because of his recommendation, I’m happy with him regardless of his estimate of 8-10x your income.
Chris, thanks for the LIMRA quote! That’s interesting.
I agree; While Dave Ramsey might be giving rule-of-thumb advice, it is certainly better to have 10x income of term insurance than none. You can always get more later, after becoming more educated on the topic (which you already are)
WOW. This demonstrates just what a powerful podcast this turned out to be given the number of comments and it is still making an impact over a year later. Maybe time for a rematch? Or you could start an entire series Steve and Joshua take on . .. Ric Edelman, The Motley Fools, Suze Orman you pick.
I am 55 years old and have a net worth of $1.2M. I have no debt (including my home). I am a simple investor (Roth IRA and 403B) in mutual funds. My income over that time frame was $35K-130K (healthcare) and I did not inherit a dime. I came across Dave Ramsey a few years ago and realized that I was following many of his principles. I agree that many of his principles are simplistic (“same advice that grandma gave…we just have all of our teeth…”). Having listened to his podcast over the last several years, it is apparent that his audience are beginners and benefit from his simple plan. Dave’s conviction comes out of his own bad experiences with debt. I agree with Josh, if you want to be successful, study successful people. As I get older, I fear the apathy and lack of critical thinking in our society…very sad…